Rankine v Lord

SOUTHERN CROSS AUTOGLASS PTY LIMITED (ACN 129 010 019)

AND: JOHN FREDERICK LORD AND ATLE CROWE-MAXWELL IN THEIR CAPACITIES AS SPECIAL PURPOSE LIQUIDATORS OF NIELSEN AND MOLLER AUTOGLASS PTY LIMITED (IN LIQUIDATION) (ACN 107 721 595)

JUDGE: MARSHALL J DATE: 12 MAY 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The appellants appeal from a judgment of the Federal Magistrates Court which set aside a bankruptcy notice ("the notice") which had been served on the respondents by the appellants. The Federal Magistrate set aside the notice on the following grounds: it was issued in the name of all appellants, including the third appellant which was not a creditor of the respondents; it overstated the debt due to the first and second appellants; and it was an abuse of process. 2 The appellants contend that the Court below erred in all three respects. The issue for determination in this appeal is whether his Honour was correct to set aside the notice on any one of the grounds set out in the preceding paragraph. There is also a notice of contention raised by the respondents pertaining to the issue of the availability of a counterclaim.

Background facts 3 The respondents were appointed as special purpose liquidators of Nielsen and Moller Autoglass (NSW) Pty Limited ("Nielsen") by order of Barrett J in the Supreme Court of New South Wales; see Lo v Nielsen and Moller (Autoglass) (NSW) Pty Limited [2008] NSWSC 407. 4 In Lo, Barrett J referred to the following facts that remain relevant on this appeal: the first appellant, Mr Rankine, was the sole director of Nielsen at the time the voluntary administration of Nielsen began; the request for the appointment of special purpose liquidators arose from the submission by a creditor of Nielsen: that all assets of value and some favoured creditors were…shifted out of [Nielsen] and into Southern Cross, leaving non-favoured creditors with Nielsen which was then subjected to voluntary administration where no return for those remaining creditors could be expected. See Lo at [6]; without making a finding on the matters raised in the immediately preceding dot point, Bennett J said at [8] that: …they point to a need for investigation by the liquidator of [Nielsen] and indicate a possibility that various recovery proceedings might be pursued or, at least, considered by the liquidator in the interests of the creditors; and "there are aspects of the affairs of Nielsen which required examination and investigation"; see Lo at [19]. 5 The specific powers and functions conferred on the respondents included powers to: investigate the creation and registration of a fixed and floating charge by Nielsen to the first and second appellants as trustees of their family superannuation fund; investigate the circumstances in which the third appellant ("Southern Cross") was registered at or about the time (21 December 2007) when a creditor of Nielsen lodged a winding-up petition in the Supreme Court of New South Wales; investigate the circumstances in which the first appellant became, at that time, the sole director and shareholder of Southern Cross; investigate the circumstances concerning the transfer of the entire assets and undertakings of Nielsen to Southern Cross; investigate the conduct, involvement and knowledge of Southern Cross concerning its acquisition of the assets and undertakings of Nielsen; and take steps, including legal proceedings, to ensure preservation and protection of the assets of Nielsen, whether or not in the possession of Nielsen, and including against the respondents. 6 In their capacity as special purpose liquidators the respondents commenced an examination proceeding in the Supreme Court. Summons were issued for the first and second appellants to be examined about some of the examinable affairs of Nielsen. Production of certain documents was required. The first and second respondents then moved by interlocutory process to set aside the orders for production. 7 Justice Hammerschlag set aside the orders for production issued by a Senior Deputy Registrar of the Supreme Court to each of the first and second appellants. At [97] of the reasons for judgment in Re Nielsen and Moller Autoglass (NSW) Pty Limited (in liq); Geoffrey James Rankine v John Frederick Lord [2008] NSWSC 1197, Hammerschlag J said: The liquidators are to pay the Rankines' costs of the application. 8 On 15 December 2008, the Supreme Court removed the previous liquidator of Nielsen and appointed the respondents as liquidators of Nielsen. The respondents then ceased to be special purpose liquidators. 9 On 16 April 2009, the appellants sought a costs assessment in the Supreme Court in respect of the costs ordered by Hammerschlag J against the respondents in connection with the examination production orders. 10 On 25 June 2009, the first and second appellants commenced a proceeding in the Supreme Court against the respondents as liquidators of Nielsen and against Nielsen. They sought an inquiry under s 536 of the Corporations Act 2001 (Cth) into the conduct of the respondents as liquidators of Nielsen. 11 On 22 September 2009, a costs assessor assessed costs in respect of the examination production orders as follows: $24,845.25 to the first and second appellant against the respondents; and nil for Southern Cross. 12 On 3 March 2010, a certificate of judgment for $24,995.25 was entered in the Local Court of New South Wales in favour of the appellants as "judgment creditor" and against the respondents as "judgment debtor". 13 On 8 April 2010, at the request of the appellants, the Official Receiver issued the notice for the amount of $25,204.69. 14 Personal service of the notice was effected on the respondents on 23 April 2010 at their accountancy practice, PKF. That was the first time they, or their legal representatives, became aware of the notice or the existence of the local court judgment on which it was founded. 15 On 12 May 2010 the notice was formally served on the legal representative of the respondents. 16 On 18 May 2010 the following occurred: the respondents sought the withdrawal of the notice pending the determination of Supreme Court proceedings between the parties; the appellants indicated that they wished to press on with bankruptcy proceedings; and the respondents informed the appellants of the obvious solvency of the appellants. 17 On 28 May 2010, the respondents served on the appellants a signed notice pursuant to s 41(5) of the Bankruptcy Act 1966 (Cth) ("the Act") that they dispute the validity of the notice on the ground that it mis-states the debt due by specifying a sum that exceeds the amount actually due. 18 On 1 June 2010 the respondents filed an application in the Court below to set aside the notice. 19 On 10 June 2010, the appellants obtained an order from the Local Court amending the judgment in that Court by removing Southern Cross as a judgment creditor.

The abuse of process issue 20 The Federal Magistrate found at [26] that the request to issue the notice against the respondents "was not so much to secure payment from recalcitrant debtors but to embarrass them". 21 At [27], his Honour referred to other methods to enforce a judgment and specifically to a "garnishee order". 22 His Honour said at [27]: The applicants [current respondents] are partners in a firm of accountants. It would have been simple for a garnishee to be issued against that firm in respect of any drawings or profits payable to the debtors. There has been no suggestion that the …[current respondents] are personally insolvent, it is acknowledged that notwithstanding their personal liability for the costs, they were acting in their capacity as special liquidators and court officers….. 23 The Federal Magistrate went on (also at [27]) to refer to unassessed costs orders which have been made in Supreme Court in favour of the current respondents with respect to their litigation with the first and second appellants. His Honour then said: In circumstances like this where the relationship between the parties has become severely strained, as it clearly is, the Court should look very carefully at the way in which [the notice]…is sought to be used. A misuse of the processes at the Court constituted an abuse of process. 24 His Honour referred to various authorities at [27] and [28] and then said at [29]: The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones. Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends. 25 The Federal Magistrate referred to the "course of dealings" between the parties and in particular to the events of 18 May 2010 referred to at [16] above. His Honour then said at [29]: …this course of dealings and the failure of the respondents to take any other steps to execute upon their judgment is indicative of an intention to utilise the bankruptcy process for reasons other than securing the orderly distribution of the debtor's estates. 26 His Honour noted that the respondents are partners in an established insolvency practice and are officers of the Court with a right of indemnity over the assets of Nielsen. 27 Taking all of the foregoing considerations into account, the Federal Magistrate concluded that "the issuance of this notice constitutes an abuse of process and it should be set aside on that ground". 28 The finding of the Court below that the issuing of the notice was an abuse of process is a finding of fact. I consider that it was a finding which was open to his Honour on the evidence before him and a correct and appropriate finding in all the circumstances. 29 Counsel for the appellants submits that the respondents bear a heavy onus in establishing that the notice was issued for an improper purpose. Counsel referred to the judgment of Heerey J in Reid v Hubbard [2003] FCA 1424. Reid dealt with an application by a third party to set aside a bankruptcy notice. At [40], his Honour noted that the case before him "was beset not only with improbability but also internal inconsistency". 30 I can detect nothing in the reasons of Heerey J in Reid which supports the view that a particularly heavy onus is required to be met before a bankruptcy notice will be set aside as an abuse of process. A court considering such an issue will examine that matter objectively having regard to the entire relevant factual matrix and if it forms the view that the issuing of the notice is an abuse of process it ought not feel timid about saying so. Certainly the Federal Magistrate suffered from no such timidity and rightly so. 31 The appellants next submit that the solvency of a debtor is not a ground to set aside a bankruptcy notice. They rely on Re Athans; ex parte Athans (1991) 29 FCR 302 at 310, per Hill J. At 310 in Athans Hill J said that: The mere fact that the debtor is solvent is not a ground for the court to set aside a bankruptcy notice. (Emphasis added.) However, his Honour immediately went on to say: The Act gives no general discretion to the court to set aside bankruptcy notices valid in form which are not an abuse of the process and I know of no case where a bankruptcy notice has in such circumstances been set aside. (Emphasis added.) 32 Justice Hill is not to be taken as saying in Athans that a bankruptcy notice being issued will not be an abuse of process by reason of the solvency of a debtor. The solvency of a debtor and the attributes of the particular debtor and his or her history with the creditor will be relevant to the issue of bona fides of a bankruptcy notice. So much is so as a matter of practical commonsense. Nothing in the judgment of Drummond J in Amos v Brisbane TV Land (2000) 100 FCR 82, especially at [21], as relied on by the appellants, stands to support a contrary proposition. 33 Whether or not the bankruptcy notice has been issued as an abuse of process is a question of fact for the trial judge. As long as the trial judge commits no appealable error in that fact finding exercise, the primary finding should stand. The appellants contend that Raphael FM took into account an irrelevant consideration and largely based his judgment on that matter. That consideration was said to be the respondents' status as officers of the court. His Honour did refer to the fact that as liquidators the respondents have that status. However, that was only one piece in the jigsaw puzzle that constituted the factual matrix before the primary judge. It was also important that the respondents were partners in a large insolvency practice and were engaged in Supreme Court litigation in opposition to the first and second appellants. There was ample material before his Honour to support his finding that the appellants caused the notice to be issued, not to secure payment of the costs order but for the predominant purpose of embarrassing the respondents. As counsel for the respondents submits, if the predominant purpose of the issuing of the notice was to have the costs order satisfied, a formal request should have been made for payment to enable the appellants to respond to that request, in the context of continuing litigation between the parties in the Supreme Court. Further, from November 2009 to 23 April 2010, the respondents acted on the basis that the appellants were seeking a review of the quantum of the costs certificate to obtain a higher amount. 34 For the foregoing reasons the Court rejects the submissions of the appellants that the Federal Magistrate erred in finding that the issuing of the notice was, in all the circumstances, an abuse of process.

Other grounds 35 Having found that his Honour correctly assessed that the notice was issued as an abuse of process, it is strictly unnecessary to deal with other grounds of appeal. However, I will briefly state my reasons for rejecting them.

(i) The inclusion of a non-debtor in the notice 36 In my view the inclusion of Southern Cross in the notice invalidated it. Only a creditor has standing to cause a bankruptcy notice to issue. The Federal Magistrate was correct to determine that such inclusion was not a formal defect or irregularity capable of being cured by reference to s 306 of the Act or otherwise remedied by s 30 or 33(1)(b). 37 Under s 41(1)(a) of the Act a bankruptcy notice may be issued on the application of a creditor who has obtained against a debtor "a final judgment or final order". Southern Cross was not entitled to have the notice issued in its name. See Re Gibbs; ex parte Triscott (1996) 65 FCR 80 at 84, per Drummond J and the cases referred to mid-page 84. In the context of the Act, its general purpose and "the particular purpose of provisions relating to bankruptcy notices", the defect of the bankruptcy notice was not merely formal one; see Adams v Lambert (2006) 228 CLR 409 at [26]. The purpose of bankruptcy notices is to assist in securing the payment of debts owed to a creditor. Non-creditors have no place or business causing such notices to be issued.

(ii) The mis-statement of the debt 38 The notice took into account the sum of $150, being the fee paid to the Local Court by the appellants for filing the costs certificate. The Local Court was not authorised to issue a certificate of judgment in an amount which included the filing fee. It was confined to issuing a certificate of judgment in an amount equal to the costs order. Croker v Commissioner of Taxation [2005] FCA 127 applies to the circumstances of this case. As Hely J said at [10], the consequence of filing a certificate in the Local Court under s 208J(3) of the Legal Profession Act 1987 (NSW) is that the certificate is taken to be a judgment of the Local Court for the amount of unpaid costs. There was no authorisation to add any further amount to that judgment debt. 39 Justice Hely at [15] referred to the judgment of Gibbs CJ in Walsh v Deputy Federal Commissioner of Taxation (1984) 156 CLR 337 at 339, where his Honour expressed no doubt that a bankruptcy notice will be invalid if the sum specified at the amount due exceeds the amount for which the creditor is entitled to issue execution, subject to s 41(5) of the Act. As referred to at [17] above, s 41(5) was enlivened by the respondents in this matter. 40 Section 98 of the Civil Procedure Act 2005 (NSW) governs the powers of a Court to award costs. Nothing in that provision permits a filing fee to be added to an amount of costs which has been set by the Court. The addition of the filing fee to the sum of costs was, as counsel for the respondents contend, an administrative or clerical act by a Local Court registry official and not exercise of the Local Court's jurisdiction under s 98 of that Act.

The respondents' notice of contention 41 The respondents, by notice of contention, submit that the judgment under appeal should be affirmed on a ground other than that relied on by the primary judge. They submit that the respondents did have a counter-claim, set off or cross demand equal to or exceeding the amount of the judgment debt which they could not have set up in the proceeding in which the judgment was obtained; see s 40(1)(g) of the Act. Having regard to the view of this Court that the grounds of appeal show no appealable error it is unnecessary to deal with the notice of contention. 42 The Court will order as follows:

1. The appeal is dismissed.
2. The appellants pay the respondents' costs of the appeal to be taxed in default of agreement. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.